Different cost of capital with changed proportions, Financial Management

Assignment Help:

Different Cost of Capital with Changed Proportions: It is quite possible that the specific costs of capital of different sources may be affected by the amount of funds' raised and the proportion of a particular source may also change as a result of new funds. Consequently, the WMCC may also change and vary differently. For example, following is the capital structure of firm:

Now suppose, the firm has an investment proposal of Rs. 10,00,000 and expect to generate retained earnings of Rs. 2,00,000 from the current operations. The remaining funds are raised by the issue of Equity share capital (Rs. 6,00,000 at 12%) and 12% Bonds (Rs. 2,00,000). The WMCC of the firm can now be ascertained as follows:

WMCC =.6 (.12) +.2 (.11) +.2 (.06) = .106 or 10.6%.

The WACC of the firm can now be calculated as follows:

Source

Amount (Rs.)

Weight

C/C

Weight )( C/C

Equity share capital

25,00,000

.417

.11

.0458

Equity share capital

6,00,000

.100

.12

.0120

Retained earnings

12,50,000

.208

.105

.0228

Retained earnings

2,00,000

.033

.105

.0036

11 % Debentures

12,50,000

.209

.055

.0115

12% Debentures

2,00,000

.033

.060

.0020

 

60,00,000

1.000

 

.0977

The WACC of the firm is .0977 or 9.77%. So, the WACC has increased from 9.6% to 9.77% as a result of WMCC of 10.6% (which was higher than the then WACe). So, the WMCC has lifted the WACC.


Related Discussions:- Different cost of capital with changed proportions

Debt holders versus shareholders, Debt holders versus Shareholders A se...

Debt holders versus Shareholders A second agency problem arises because of potential conflict between stockholders and creditors. Creditors lend finances to the firm at rates w

Financial management, using the operating cycle and any other financial man...

using the operating cycle and any other financial management knowledge,discuss the applicability of such cycle to poultry business in Uganda(consider broilers)

Which ratios is potential long term bond investor, Which ratios would a pot...

Which ratios would a potential long-term bond investor be most interested in? Explain. Potential and Current lenders of long-term funds, like banks and bondholders, are interest

Determine the limitations of trade receivable day ratio, Determine the Limi...

Determine the Limitations of trade receivable day's ratio Year-end trade receivables may not be representative of the year. Credit sales are VAT exclusive in the Incom

What is the maximum additional short-term funding, B.J. Industries has a cu...

B.J. Industries has a current ratio of 2.5, with $2.5 million in current assets.  Due to sales growth, the company wants to expand accounts receivable and inventories by

What is the difference between ias 14 and ifrs 8, Differences between IAS 1...

Differences between IAS 14 and IFRS 8 IFRS 8 requires identification of operating segments based on internal reports which are regularly reviewed by management for decision

Resource acquisition and resource planning, 1. List five different types of...

1. List five different types of resource that a company might consider hiring or leasing. Explain why the might choose these option instead of outright purchase 2. List three di

Constructing synthetic swaps, (a) Prior to FAS 133 if companies qualified ...

(a) Prior to FAS 133 if companies qualified for hedge accounting their hedges were assumed to be perfect-no valuation or testing required. Currently under FAS 133 risk managers se

Define the explicit cost of capital, Define the Explicit cost of capital ...

Define the Explicit cost of capital Explicit cost of retained earnings that involve no future flows to or from firm is minus 100 per cent. This must not tempt one to infer that

Cost of sales and functioning costs, Entity A is significantly smaller than...

Entity A is significantly smaller than B in terms of revenue and would not impact LOP's revenue to the same extent. However A earns a noticeably better gross profit margin at 26% a

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd